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Other Contract Discharge Options: Rescission, Novation & Accord

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  • 0:01 What Makes a Contract…
  • 1:27 Rescission
  • 3:38 Novation
  • 4:15 Accord
  • 4:52 Lesson Summary
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Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

In general, a contract is a legally binding agreement in which two or more parties make and agree to certain promises. Although the parties are bound to the terms, the parties may agree to discharge the contract through rescission, novation or accord.

What Makes a Contract Legally Binding?

A contract is a legal agreement that binds the parties to certain promises that each makes. There are a few elements that make this agreement legal and the terms enforceable:

  • The parties
  • Mutual consent
  • Legal object
  • Consideration

Let's break it down. The parties to a contract must be of legal age, free of mental illness and addiction, and not under the influence of alcohol or drugs. All parties to a contract must also express mutual consent, meaning each party agrees to their promises of their own free will. In other words, a contract is invalid if one or more of the parties entered into the agreement under duress, as a result of a threat, or did not completely understand the terms.

The object of the contract must contain terms that are legal and do not violate any laws or statutes or Constitutional rights. For example, one cannot engage in a contract for murder. Lastly, for a contract to be valid and enforceable, consideration must be given. This is an exchange of something of value, like money, for performance.

Once all of the binding elements have been met, the contract stands and is enforceable by law. And getting out of a contract can be difficult, but not impossible! Let's explore a few ways in which a contract can be broken.

Rescission

To discharge a contract means to legally terminate a contract under specific situations. One way to discharge a contract is through rescission. This means a contract can be legally terminated by mutual agreement, by law or court action, or by one party for a reasonable cause. Here are a few examples where rescission may be the right option:

  • One or more parties were under duress at the time the contract was written.
  • All or some of the parties were not of legal age to enter into the contract.
  • One or more of the parties misrepresented the promises.
  • The contract contained mistakes.

Contract basics remind us that all parties must be of legal age and of free will to enter into a legally binding agreement. The agreement must also contain accurate and factual information. Otherwise, it can be considered fraudulent.

For example, when Captain Jack decided he wanted to sell his fishing boat, he knew there would be tough competition. Many of the local fishermen were selling similar models. So, Jack thought long and hard about the best way to market the vessel. In a rare moment of genius, it came to him! He would post photos of a much larger and more beautiful boat in the online ad. He thought this would attract more potential buyers.

Sight unseen, Alfredo Romano, a buyer from Italy, made an offer and signed the contract for the purchase. In the contract, Jack included a description of a completely different boat. In fact, he increased the size and lowered its age. When the boat arrived in Rome, Alfredo was hotter than a bowl of his mamma's spicy meatballs. It was half the size and twice the age of the boat featured in the ad!

In this case, Alfredo had every right to rescind the offer to buy Jack's boat. The contract contained fraudulent and misleading information, including the size and age of the boat. Once Alfredo terminates the contract, it's irrevocable. The terminating action cannot be reversed regardless of whether Jack fesses up or changed the boat description. It was like the contract never existed.

Novation

Another way to discharge a contract is novation, which simply means substituting the old contract for a new one with different terms. Novation would be used if a new party takes over the responsibilities of an original party to the contract. In the case of the fraudulent fishing boat, Alfredo could have opted to find a person in Italy to assume the obligation of paying for the boat. In this case, Jack and the new party would create a new contract freeing Alfredo from any further responsibility to the promises. The novation would include only Jack and the new buyer.

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